Why Spicejet & Indigo Stocks Are Falling? | Covid-19 impact

Coronavirus Outbreak – Impact on Aviation Sector (Spicejet & Indigo)

Introduction

Why Spicejet & Indigo (Interglobe Aviation Ltd) stocks are falling? Lets analyze the impact of Coronavirus outbreak on aviation stocks, which are on turbulent ride currently.

Why Spicejet & Indigo Stocks Are Falling?

Shares of aviation companies are under pressure on concerns that the industry may face risks from the coronavirus outbreak. What Lies Ahead? Are there any Trading Opportunities for Positional Traders?

Correction in Share Price of Spicejet Ltd

The share of Spicejet Ltd fell by almost 48% from January 1, 2020. Since last 1 year, the stock price have dropped by 60% from its 52-week high of Rs.152.

Correction in Share Price of Interglobe Aviation Ltd (Indigo)

The share of Interglobe Aviation Ltd (Indigo) declined by 23% from January 1, 2020. Since last 1 year, the stock price have dropped by 39% from its 52-week high of Rs.1,891.

Reasons for Fall in Share Prices of Aviation Stocks

1. Economic Slowdown
   • Almost 75% of total revenue of Indian aviation companies come from domestic traffic.
   • Amidst dampened economic activities, India’s GDP growth rate for FY2019-20 is declining consistently. Quarterly GDP growth rates were 5.6% in Q1 FY20, 5.1% in Q2 FY20 and 4.7% in Q3 FY20.
   • Thus, there has been a stagnancy in the passenger growth over domestic flights amidst current economic slowdown in India.
2. Coronavirus Outbreak
   • 25% of total revenues come from International Traffic. The region-wise % share in overall international traffic is as following :
     1. China : 4% of International Traffic
     2. Total Asia : 30% of International Traffic
     3. Europe : 25-20% of International Traffic
   • So, there has been a big shock for Indian airlines’ International Plans due to Coronavirus crisis spread across many countries. A number of International flights to-and-fro China, Italy, Singapore, Iran etc are cancelled.
   • So, Airlines are getting a big hit from Coronavirus outbreak.
3. Upcoming Impacts of Less Traffic
   • Executed Dip in Traffic will be experienced due to cancellation of many routes and dampened demand amidst coronavirus fears.
   • The subdued traffic will result into more pressure on fares & subsequently on Yields of these airlines.
4. Decline in Passengers Growth
   • There has been a muted Passenger growth in Jan-Feb 2020 = 2-3%
   • Whereas, last year, the Passenger growth in Jan-Feb 2019 = 16%
   • It will affect the profitability of the aviation companies and will give a hit to their upcoming results in Q4 FY20 as compared to Q4 FY19.

Key Opportunities & Relief for Aviation Industry

1. Coronavirus Crisis – A Medical Emergency
   • The recent coronavirus outbreak would have a short term impact on the aviation industry. Things are expected to revive in next 1-2 quarters. However, the airlines need to remain flexible and nimble while dealing with the situation.
   • Once the Coronavirus gets under control, there would be a much faster upturn in the share prices of aviation stocks.
2. Decline in Crude Oil Prices – Expected to offer Relief
   • Crude Oil prices dropped by almost 33% from January 2020. Lower oil prices provide significant tailwinds to the Indian economy as India imports more than 80% of its crude oil demand.
   • Aviation sector is among the top sectors in India which are going to be benefited from the decline in crude oil prices. Lower crude oil prices would result into lower fuel bills for Aviation companies.
   • There would be an upsurge in the profitability of aviation stocks like Air India, Spicejet & Indigo (Interglobe Aviation) due to lower Crude Oil prices.
   • $1 reduction in crude oil price per barrel leads to 7% growth in the EBITDA of these aviation companies. Thus, the lower crude oil prices would offer a great relief to aviation companies to support their profit growth amidst current slowdown and coronavirus outbreak.